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Quanta Analytics. Federal Government Budget Overview Some Things Are Just Too Important Not to Understand. Federal Budget Overview Some Things Are Just Too Important “not” to Understand.

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During earlier periods of our most recent financial crisis, Quanta Analytics spent most of its time tracking and monitoring changes in the Banking Industry and setting up QA’s process for continually monitoring that industry. With much of that work complete and in place, QA has turned its attention towards the Federal Budget and the Federal Deficit.

There are some things that are just “too important not to understand” and our Federal Government Budget process that has lead to our substantial National Debt is one of those things.

In this Overview presentation Quanta Analytics will show and explain, using fifty-years of Federal Government Budget history, what all the “hub-bub” regarding the Federal Budget and National Debt is all about.

Additional details regarding the Federal Budget are presented in follow-up presentations associated with this one.

The financial information appearing in this presentation is obtained from the historical tables regarding the Budget of the U.S. Government as presented in the Financial Report of the United States provided through the Financial Management Service.

The analysis herein is the work of a single individual, Jim Boswell.

Jim is the Executive Director of Quanta Analytics.

He has an M.B.A. from the University of Pennsylvania, The Wharton School,

An M.P.A. from Indiana University, School of Public and Environmental Affairs; and a

B.A. in mathematics from Hanover College

Jim is a veteran, who served as a junior officer on a fleet ballistic missile submarine

Jim worked as a Budget Analyst for the Department of Energy during the “first energy crisis”

Later, he worked for PricewaterhouseCoopers LLP for 15 years prior to starting his own “think tank”.

In 1995 Jim was awarded a Vice-Presidential “Hammer” Award for his work designing the primary systems used by Ginnie Mae to monitor the risk of their portfolio.

Jim was integrally involved in analyzing data and developing solutions throughout the S&L crisis.

Jim is the author of Crush Depth Alert, subtitled Solutions for Supplying Power to America’s Distressed Financial Systems

The following graph is just a “warmer-upper”. What it shows is the actual 50-year history (1962-2012) of Government receipts (revenues, taxes, in-flows, etc.) plotted against the amount of Government outlays (expenditures, spending, out-flows) for every year during that period of time.

There is little that Quanta Analytics expects the viewer to pull away from this particular graph; however, it does begin to provide a sense of how the Federal Budget has grown over the years.

Later graphs will break this information down into more meaningful perspectives.

Right up front Quanta Analytics wants to caution the viewer not to lose sight of the “Big Picture” by focusing solely on the last few years of budget history. The problems with the Federal Budget that Quanta Analytics will describe cannot be laid at the feet of the current Administration nor can it be laid at the feet of one particular political party (Democrat or Republican) in general.

The Federal Budget problem is an “American” problem and one that has been overlooked by Presidents (who submit budgets to Congress and manage the Executive agencies that do the spending) of both parties and Congresses (who appropriate spending levels) of both parties for more than fifty years.

Probably the best perspective one can gain relating to the Federal Budget history is to look at revenues and outlays in relation to the U.S. GDP. The following three graphs will provide that perspective. And this perspective should be telling and “understood”.

The first graph in this series shows that although Federal Revenues have varied in relation to the GDP at different times in our history, on average they have been at levels representing 18.1% of our GDP.

The second graph in this series shows that although Federal Outlays have varied in relation to the GDP at different times in our history, on average they have been at levels representing 20.8% of our GDP.

The third graph in this series shows that this variance between Federal Revenues and Federal Outlays is not just a recent phenomena, but one that has been steady and in place for nearly fifty years.

Again, Quanta Analytics cautions the viewer not to focus on any particular period during the fifty-year period time (including the most recent period). It serves no purpose at this time to “point fingers” or “place blame”. This 2.7% gap between the Revenue/GDP ratio and the Outlay/GDP ratio is at the heart of our National Debt problem—and this problem has been an ongoing one for the last fifty years.

This 2.7% GDP gap actually represents a 15% difference (20.8/18.1) between actual revenues and actual outlays. But we cannot stop here. Things are actually worse as we will come to see in later graphs.

When Outlays exceed Revenues, the result are “Deficits”. When Revenues exceed Outlays, the result are “Surpluses”. The following two graphs show how the historical gap between Government Revenues and Outlays has lead to an accumulated buildup in our Federal Deficit.

The first graph of this series simply shows how the “Budget Deficit” has grown over the past fifty years.

The second graph of this series offers a comparison to that Budget Deficit accumulation, showing what the “Budget Deficit” would have been:

(1) If Federal “Outlays” had been steady at 18.1% of GDP over the last fifty-years keeping actual Revenues the same; or

(2) If Federal “Revenues” had been steady at 20.8% of GDP over the last fifty-years keeping actual Outlays the same.

However, Budget Deficit numbers, by themselves, do not tell the full story of our “American” problem.

The next two graphs begin to explain why our Budget problem is actually worse than what we have explained so far. Besides spending more “Outlays” than “Revenues”, our American parties have also been robbing “Peter to pay Paul”. In other words, our National Debt is even greater than our Federal Deficit.

The first graph in the next series shows the difference between the “National Debt” and our Federal Deficit.

And the difference between our “National Debt” and our “Federal Deficit” is explained in the second graph of this series. For fifty years we have been taking Social Security Revenues designed for “future” Outlays and using them to cover “current” Outlays. In truth, if you only count Social Security revenues that are used to cover current Social Security outlays, the true amount of Federal Revenues has averaged only 16.4% of GDP, compared to the earlier figure expressed as 18.1%.

Thus, in truth, the real gap between current Outlays and Revenues meant for current expenditures is a gap, not of 2.7% of our GDP like we showed before, but instead a gap of nearly 4.4% of GDP. In other words, the history of our spending gap essentially represents nearly a 27% difference (20.8/16.4) between current Revenues and current Outlays, rather than the 15% gap (20.8/18.1) explained before.

Now no one should expect the Federal Government to always run a balanced budget. In fact, most economists and realists would expect the Government to show deficit spending during periods of “war” and “national recessions/depressions”.

Regardless, probably the best way to gain a sense of our National Debt in economic terms is to compare it to our GDP.

The first graph in the next series, shows how the relationship between our National Debt and our GDP has changed over the last fifty years.

The second graph in this next series, goes back even further, and shows how that relationship changed over the last eighty-years.

Hopefully, by looking at the two graphs separately we can begin to gain a better scope on our current American problem.

From the previous graph it is clear that our National Debt when compared to our GDP has in fact been worse than it is today.

However, there are some things that we cannot ignore about today’s figures and these include the following:

(1) World War II was an extraordinary time period and after the war, America began paying off for the cost of that war by growing its GDP.

(2) No war anything like World War II can explain the growing trend of our National Debt to GDP ratio over the past 30-years. There are other causes (to be explained shortly).

(3) Our current GDP is approximately $14.5 Trillion and if future Government Deficit spending exceeds the expected growth in that GDP ($14.5 Trillion x 3.5% = $507 ) then our Debt to GDP ratio will also continue to grow. If we grow our GDP less than 3.5% the problem even becomes more difficult to solve.

(4) “Ten percent unemployment” works against the Federal Budget by reducing Federal Revenues and increasing Government outlays—and thus “increasing” Federal Deficits; and finally

(5) To begin reducing the size of our National Debt or even keeping it relatively level we will need to “raise revenues”, “decrease spending” or “raise our GDP” and probably some combination of the three.

Now here is the rub. Let’s look at the source of the Federal Revenues that we have been talking about first by looking at the relative contribution of that revenue by source.

Of the three options available (raising taxes, reducing spending, or growing our GDP) to manage our debt in relation to our GDP, raising taxes always seems to be the option of last choice. It’s better to increase taxes by growing our economy (GDP) than it is to raise tax rates themselves. Even so, QA feels that it is important to understand the history and relative source of the revenues used to cover Govt expenditures.

The previous graph showed this and indicates the following:

-- Individual income taxes represent the source for approximately 45% of all federal revenues;

-- Social security payments represent the source for approximately 35% of all federal revenues;

-- Corporate taxes represent the source for approximately 10% of all federal revenues; and together

The previous graph also shows that between 1962-1982 as the relative amount of Federal Revenues associated with Social Security grew to become somewhat of a steady level of 35% all revenues, they did so while the relative proportion of Corporate and Excise taxes fell during that same period.

Now assuming we cannot raise taxes to help tackle the growing Budget Deficit problem in America, then we have to look toward expenditures. The next graph shows expenditures by Government function.

It is very clear by looking at the relative change in expenditures by government function as the American Government grew it shifted its focus more towards “butter” than “guns”.

Over the past fifty years the Human Resource category grew from representing 30% of all Government expenditures to now representing approximately two-thirds of all government expenditures.

Over that same period, spending on Defense decreased in relative terms from representing 50% of all Government expenditures in 1962 to its present level of approximately 20% today.

Despite an increasing Budget Debt, net interest expenditures have benefited from lower “interest rates” and has remained at approximately the same of 10% of expenditures.

So all in all, when you add everything up (knowing that it is hard to reduce interest payments without reducing debt) you find outside of Human Resources and Defense there is little left to look at when looking for “significant” places to cut.